Steve Hanke, professor of applied economics at Johns Hopkins University, Hong Fang, CEO of OKCoing, and Saifedean Ammous, author of ‘The Bitcoin Standard’, continue the conversation in part 2 of this debate. The focus is on Bitcoin's role as a global currency, and the possibility of creating a currency board based on cryptocurrencies.
Dr. Atmos. I'd like to draw a drawing attention to a comment that a federal, federal reserve chair, Jerome Powell has recently made this week in his testimony. He said that crypto assets are highly volatile and therefore not useful as a store of value. He said it is a speculative asset that is essentially a substitute for gold rather than for their dollar.
What assumptions is fed share, uh, Jerome Powell making here. And do you agree with his statement? I think, you know, he's probably correct to the extent of his own preference. He seems to prefer currencies that lose value steadily over time, time with genital predictability, to currently see that gain value with some volatility.
And I think, you know, uh, there are different flavors of ice cream in the world, and there are different kinds of currencies. And the beautiful thing about Bitcoin is that now offering us a free market test, we're watching all those national currencies built on the idea of that. They need to lose value every couple of years to stimulate the economy grow.
We're watching this obligation of currency that gains value. So, you know, uh, Powell is welcome to hold whichever he wants, but I think, uh, you know, the market shows Bitcoin has appreciated 200% on average every year over the last 10 years, I think, you know, professor Han can, professor Powell need to be asking themselves a little bit more.
About what is it that people see in this thing? Why has it not been displaced by all the other cryptocurrencies? And I think the point that I'd like to make to professor AQI is when you were mentioning the specifications of a great currency, Bitcoin effectively has one that substitutes for most of them, which is the fact that nobody controls it.
Nobody can change the supply. It's been 12 years, it's a trillion dollars. And nobody has figured out a way to make more Bitcoin more than what is originally scheduled. So this is the first thing that is truly scarce. And this is what distinguishes Bitcoin from the other currencies, because none of them has demonstrated the degree of immutability that Bitcoin has, which assures everybody in Bitcoin, that they can be 100% certain, almost that there's never going to be more.
You can't get that kind of security from any of the other networks. And I think this is, this is a very, very important point about what gives Bitcoin value. Dr. Emerson. I have one more follow-up question for you. You're currently living in Lebanon where you experienced and can observe very high levels of inflation.
Now, if I were to present to you options for hedging inflation, let's say gold Bitcoin stocks, um, government issued bonds. For example, what would be your preferred instrument to protect yourself from inflation? I mean, well, I'm not living in Lebanon anymore, but my preferred instrument would be Bitcoin because I think, you know, the, the important characteristics of money, uh, and the important characteristic of money is saleability.
It's the degree to which you can sell it without it losing its value. And I think in Bitcoin's case, there are two parameters for saleability, scalability across time, the ability of money to hold onto its value across time and saleability across space, the ability to move money across space. And I think.
Bitcoin wins hands down compared to the art currencies and the gold in that regard. It's. Uh, ability to hold on to value across time is very good and standing is 200% appreciation a year, but it's also very cheap to send halfway across the world. And this is when people saw talk about Bitcoin, not having utility.
You can sell, send money from the U S to China in a couple of hours without having to use any of the, uh, national, uh, government, uh, inf infrastructure and institutions like the central bank. This is an enormous. Enormous advantage, which places in Lebanon, you know, they're beginning to see the value of that because the dollar might be great and it's more acceptable than Bitcoin in a place like Lebanon, but you can't send the dollar abroad because the banks won't let you, the banks are closed.
There's capital controls, and there's all kinds of problems that one gets around that. On the Lebanon, David Lee, let me just make her remark because I follow it hour by hour. Uh, actually in the last year, the Lebanese pound is shed 81% of its value. And, and today I just majored. The inflation rate is 378% per year.
They are hyper inflating. They started hyper inflating in July. But this gets to the point about Bitcoin versus the dollar and used and utility. Everyone wants what in Lebanon and they want dollars everyone around the world does. And this is a utility. Almost all commodities traded in the world are invoiced and priced in dollars.
40% of all trade, all trade manufacturers, commodities, everything else. Are priced in dollars. 60% of all central bank reserves are dollars. 90% of every foreign exchange transaction has a dollar on one side of the trade. So in terms of use and use value, The the dollar is the great currency. It is the international currency, all this Bitcoin talk it's, it's a minor footnote in terms of utility and use.
There must be a price at which you would have to, uh, you know, if you think it's small, then it has to be able, you have to be able to name a price at which you would admit that it's no longer small. It's no longer footnote because it is much bigger than it was last year in Lebanon. It's not as big as the dollar yet.
But it's much bigger than what it was last year. So if the trend continues, you know, at what level would you admit that, you know, this is just something that people can use. It works. It does what it says on the tin. You can send it across the world and it maintains itself. It takes time when Elon Musk first started to invent electricity card people in the traditional, uh, auto industry.
Think that that was just a joke, a footnote. But now Tesla is probably is the most valuable auto company in the world. So it takes time. And when the paradigm shifts, it comes slowly and then suddenly things. I asked professor hanky to specify a price at which Bitcoin becomes big enough for him to stop saying it has a fundamental, it just measure the measurements that I've given you, the dimensions that I've given you.
So Bitcoins. In other words, how many, how many commodities, when are we going to start pricing oil in Bitcoin? When are we pricing corn? When are we pricing wheat? Okay. That's a commodities. What are we going to start? Pricing cars and manufactured goods and Bitcoin. What, when or what? You're talking about?
The specularity of aggregate moving this thing around. I'm talking about. The uses of it and transactions being used in transactions, Dr. Hanky, it's probably just not as visible to us in us than to other people living in different regimes where inflation is super, uh, is, is taking away their health. For example, in Latin America, there are a lot of, uh, actually, uh, commercial.
Uh, entities, uh, in, in their export, uh, business, for example, with Asia, they're selling, selling commodities to Asia, they transact in Bitcoin
and Bitcoin. Footnote the dollar dominates all of these transactions in British pound dominated at some point. And it doesn't anymore just because it does well, he doesn't need that yet. That's, that's exactly my point about an entry of a competitor, a superior competitor, and the us dollar became superior after world war one and drove the British pound Sterling to the sidelines.
I think as someone who. Let's say the idea of digital currencies, which I do. And I think that is the future. And so the question is why, what kind of superior product. Would it be desirable? And I think a currency board type crypto would be now Facebook with Libra tried this, but they had no, no one on the team obviously understood currencies very well.
And how these things work. It turns out I've established four currency boards in my life, one in Estonia in 1992. They, they didn't even have a constitution that had been approved yet. In June of 1992, we established what we established the Estonian CRIN or the currency board back to a hundred percent with reserves.
We did the same thing in Lithuania in 1994, we did the same thing on both area in 1997, when they were facing a raging hyperinflation list. Monthly inflation peaking out at 242% a month. We installed a currency board and Bosnia and Herzegovina wiped out my civil war in 1997 and August we established the currency board.
All these things work. There are no preconditions. You simply. The currency board does issue a liability that's whatever the local currency or whatever you call it. It could be a private currency. I'm advocating now private currency boards. So you issue a liability and that liability is back with a hundred percent reserves of some anchor asset and the.
Local asset or asset issued by the currency board trades at a fixed exchange rate. That's freely convertible with no restrictions to the anchor and that they're out there. They don't work, they haven't been audited. They they've had all kinds of problems and that's precisely why they have not been able to, to nudge.
They, they have reduced the market share of Bitcoin, but they haven't really been able to put it out of the market and compete. They're very inferior. And, and we had a stillbirth with, uh, the Libra Lee, the Libra white paper actually did mention the words currency board, but it, it was a false start. It was properly done.
And I think if one was done right. Uh, or others were done, right. They could be very competitive with, with Bitcoin and would in fact be superior. Actually, I have a few more questions. Uh, Hong, I will let you talk about other forms of cryptocurrencies, but, uh, Dr. MOS, uh, let's talk about, um, the Bitcoin standards.
So, um, currency regime backed by cryptocurrencies is as possible. Could it happen? I think so. I think professor handcuffs. Of thinking of currency purely within the nation state central bank paradigm. And I think I I'd love them to just make the leap imagining that we've gotten software. Now that gets around the central bank gets around the need for a currency board and just establishes market value allows market value to accumulate.
Into a free market. Good. That is controlled by nobody. So it's not a good that it's physical. It is digital. And, but, you know, uh, if I take your computer right now and I return it to the same physical form, but I erased all the files off it that won't have the same value for you, that computer, right. It's still physically the same, but the digital stuff on it is where you have that.
So we can attach value to digital things. What in Bitcoin does is that it allows us to replace the bottom layer of central banking and central banks and currency boards. With a protocol that is set in digital stone effectively and, you know, has demonstrated incredible credibility in maintaining and supply and in maintaining the integrity of the network over 12 years.
So the question then becomes. It's it, it, you know, you don't need a currency board for Bitcoin because it would defeat the entire point because then you would have a bunch of people who control it. And those people can abuse the authority because they can always issue more live than it is. And they have this going, prevents that possibility entirely instead what we are going to be.
Getting his Bitcoin replacing the currency boards and the central banks. So then we go into build second layer solutions, like the stable coins and like the currency boards in like commercial banking backed by the Bitcoin base layer. Okay. Well, you said about the currency board. It really isn't right.
That technically you got things all mixed up, but currency board is not a central bank. It's something completely different. And you could have, by the way, what I've been advocating and that is. A gold back currency board with gold as the anchor, not who, who issue the liability of golden goose issuing that whose liability is gold it's nobody's yeah.
Onyx bond here. Yeah. Uh, because I think there are a couple of, uh, uh, things that we have discussed back and forth, but I would like to actually go back to almost like take a first principle, um, mentality and, um, and Dr. Hanky, I, I, uh, commend you on, um, your track record of setting up a currency board historically and making that.
Uh, valuable, uh, to, you know, the people in those countries that have suffered super inflation. Um, one thing, one question I would like to ask you to think about, uh, and you know, what, why would the currency board succeed right compared to some of those local currencies? And also when you talk about the list of, um, Uh, good currency standards for currency or solid currency.
I, I heard that you mentioned something that I think is very interesting and actually crucial. You mentioned something that's called monetary policy stability. I think that is really important. That is actually the key point when Paolo talking about Bitcoin's volatility. Um, I think he's mixing up with the price volatility and the monetary policy stability.
I think whenever we talk with historical, when people like chose people around the world who have been chosen, uh, gold as the store of value, historically before sovereign currency come up, came up. That's because gold is more predictable, right? That level of predictability it's monetary policy is what is driving its success historically.
And, and when you think about, uh, all the, uh, a currency board that has been successful, And those, they, they have been successful because they have been more predictable than those local currencies issued by local central banks who have no discipline in their monetary policy. It is totally unpredictable.
Uh, professional hanky talked about superior forms of cryptocurrencies, that book one day, dethroned, Bitcoin, and drive its price down. Do these currencies already exist? Are there alternative coins out there that you see fitting this definition? No, no, no, no. There is no superior form currently that is more superior than Bitcoin.
That is more predictable. That is verifiable actually. Dr. Ha. Can't hanky was talking about the, uh, potentially creating a currency board that is more superior than Bitcoin. Uh, maybe pegging against gold. How it, how verifiable is that? Bitcoin is a network that is P2P that sensitive, uh, censorship resistant.
Anyone. If you are interested in setting up a note and check it out, you can check it out. You can verify it. It's very viable, uh, to F anyone, everyone in the world, right? How can that be done for gold? You have to have a third party. Uh, running the reserve, checking it and have then invite other third parties like auditors and legal concepts to verify that there are a lot of, uh, potential points of failure in that process.
But in Bitcoin, there is no single point of failure. That is what has been making it super, uh, exciting and different and unique and superior to all the other alternatives that we have in our traditional mindset. And again, I agree with Dr. on the comment that. When you were talking about the currency criteria, those were our currencies issued by government issued by central banks.
But that's an assumption. That's not a given, like in our history of monetary usage for human beings. Uh, not all of the civilizations are using currency issued by central banks issued by the government gold at, at, for a long time is not issued by any government or bank. It was later taken by the government, uh, as kind of the reserve and, and ask, uh, the people not to use it, uh, other than being a reserve.
Right? Well, not private. The unit, the unit of account was, it was. It was something that was indicated or, uh, established by a government, but the issue of private money was very common. So what you're saying, is this not correct? There was, there was a lot of private money and private issues. Other monies are issued by third parties by individuals, either individual person or individual organization in Bitcoin's case.
No third party has been issuing it or controlling the supply or managing the management of it. It's it's all run on a protocol like professor stipending by saying it was run on the open source protocol. Everybody can see it, everybody. Who are interested enough to learn about it can go actually and run the node.
Anybody who are interested in doing it can actually build on top of it. Um, so, you know, it's very different. There's no single point of failure. We're taking away what happened with the, what happened with the various scandals that have popped up like monk, Gox and so forth. What, how do you classify that?
Was that a, wasn't that a failure? W, what was you say that this is a fail safe system? Oh, electric respond. I respond. If I, if I pick pocket, pick your bucket on and take your wallet. And I take a $500 out of it. That's not a failure of the us federal reserve central bank. The $500 are still working as intended.
So when we talk about Bitcoin not being, uh, not failing and not being attacked. The protocol itself has not validated the single fraudulent transaction. 12 years of running now transactions were done on the network where somebody managed to take somebody else's keys and effectively stole their money.
That that is a, that is a feature in all money. If you can own it, that can be taken away from you. And so, um, you know, the Bitcoin cannot remove a theft from human nature. That'll always be the case. And as long as Bitcoin has ownership, it can be stolen. And, uh, but you know, the network itself continues to operate.
So that's why I think, you know, it functions better. It's better understood as a base layer for financial settlements, uh, layers and solutions that will be built on top of it. Okay. Uh, monetary, I just want to emphasize again, that monetary policy stability. Is really the key. Uh, and I, I would, I would ask to, yeah, I, I, I disagree.
I disagree with that because we, we have a stable inelastic supply, a bit coin, and that by definition means that as the demand fluctuates, the price will fluctuate and you'll have, it's an unstable system. It isn't a stable system. It's an unstable system. Because of supply that the supply curve is completely inelastic.
Ultimately, as a result of that, the only process by which any adjustment can take place is, is the price. So the price, the price will be very volatile. I want to find out
I have a wifi topic that I like to address, and I just need to make one small answer. My last point, we have to move on Jess drums book, the golden constant gold developed the most constant value over time. And did that for centuries as discussed in that book. But you look at gold with gold supply. It also didn't have a currency board.
It also doesn't have a monetary policy where somebody was. Uh, practicing, you know, uh, monetary supply in order to stabilize the price of gold. In fact, what gave gold that stability was the fact that it had the lowest least elasticity of supply response to the demand. Gold is the one good whose supply increases the least every year because it doesn't corrode.
So gold that has been produced over thousands of years is accumulating. And so marginal production is always very tiny. Because marginal new production is always tiny compared to the stockpiles. That's what gave gold it's stability because its market is predominantly a monetary market and very little demand for industry and for a very little impact of mining.
So Bitcoin actually improves on that because it has a terminal growth rate of zero. So it should actually in time become better gold than gold in this regard. And I, I don't, I think, you know, volatility is going to be with us for awhile because Bitcoin is still very small and it's going to grow. But I think, you know, the, before we get to the point where we can use Bitcoin to buy our coffee, we need, there is an enormous stage to the cross first, which is people need to build cash balances in Bitcoin.
So that they can trade other goods with Bitcoin, but we're nowhere near that the total amount of cash balances in Bitcoin are less than 1% of total cash balances in the world. But as it grows, I think we're going to see more of that. So I think, you know, from now until the point where you can buy your coffee with Bitcoin, there is an enormous, enormous opportunity of essentially a new asset monetizing that could eat up.
Bonds and could eat up all kinds of other stores of value that people are using. So, you know, you, you, you you'll get your stability. To buy coffee at a price of Bitcoin, maybe $1 million or $5 million. So, you know, you're, you're welcome to sit it out and wait out until then. Or you can buy Bitcoins now speculating on the fact that this is going to happen.
And if you are correct, you know, it includes it. It will be massively rewarding in the long run. Okay. I have one final topic and I'll let you go first, Dr. MOS. Cause that was a good segue. Uh, the concept of. Central bank backed digital currency. Now this is being issued in some places already. The federal reserve in the U S has not indicated they're doing this immediately.
Do we need a digital digital currency as a, a unit, a national unit of account backed by digital currency? What would be the motivations of implementing such a, such a, a concept Dr. Ellis? I think, you know, central banks, um, their motivation is going to be to continue to do what are their main priorities and tasks, which is managing monetary supply and controlling payment clear.
So if they do build their central bank, digital currencies, they're going to be digital, but they're going to miss the most important characteristics that make Bitcoin important, which is that Bitcoin's monetary policy. Transparent is transparent. And payment clearance is automated by, uh, cryptography. So central banks cannot do this because it would defeat the entire purpose.
They can't just replace their monetary policy with a strict code that they leave alone. That's not what they were meant to be made. So for my, in my mind, what central bank, digital currencies are going, you are going to lead to more efficient, more effective surveillance by central banks and more effective inflation.
By central banks. And so they're going to make national currencies, um, less useful as a store of value in the long run. And, uh, I think ultimately they're going to serve as advertisements for Bitcoin's value proposition. I think that's the long run effect of it when people realize the difference between what their central bank is giving them.
Versus Bitcoin. Uh, I think that's going to be an enormous advertisement for Bitcoin Hong. What are your thoughts on CBDC and what do you think is the future of digital currencies as an asset class? Uh, on CBDC my point of view is the same with Dr. Ramos. I don't have anything additional to add. I think it's, uh, it's a combination, the worst of the two worlds.
Let's see what happens, but it's a good idea. Well, it can help, uh, it can help, uh, adoption. It can help promote awareness of digital currency. Um, but, but, uh, but it misses the most important point and actually, uh, um, essential, uh, strengthen that the, the, the bad part of Fiat currency system. Okay. And doctor, uh, professor hanky, I'll let you have the last word, uh, should central banks adopt.
Bitcoin where any other form of cryptocurrencies as a national unit of account,
uh, and the confusion that's been brought in here about currency boards, by the way, currency boards, let me say unambiguously. They have no monetary policy. They have an exchange rate policy. They exchange one asset for another asset at a fixed exchange rate. And it's credible because the. Anchor asset that they hold covers the full valuation of any liability that they issue.
So they're completely credible, but until they know they, they can't issue more liabilities until I have a hundred percent of the anchor currency as our asset, as a reserve. So, so they have no monetary policy. You're just confused about this. You don't understand. I think you're, you're underestimating.
What I'm trying to say here is the fact that they stick to redemption is a monetary policy. So the fact that they continue to redeem it and they don't issue more policy.
we'll see, but not a monetary policy, but the president can put one to the head of the chief, of the currency board and they can make more money to finance a war or to finance some new hospital building or something like that. And so you're back at square one. No, he did not. You aren't the only way they could do that as if they brought in the anchor currency and exchanged it for whatever was being issued as a liability by the currency board, they cannot.
Engage in monetary policy. You just do not understand the mechanism. So there can't be replaced the conversation. Yeah. I think Dr. Hanky, what you were saying is in a monitoring board, uh, there's no monitors, uh, sovereign monetary policy because you're looking for free of CA uh, free capital flow and also a fixed exchange rate.
Right? So you have to give up salary in monetary policy. I E the monetary policy for, uh, uh, monetary bop board. Is actually the, the monetary policy of the incurred assets. For example, if you're using gold and crit that's, that's the monetary policy at the goals that that's actually being done, not, not, not really good at Hong Kong and then figure out how the thing works.
And you'll see that the quantity of Hong Kong dollars in circulation is strictly. A matter of the demand for Hong Kong dollars and the, in that sense, it's just exactly like Bitcoin. It's the demand. The quantity of the issue of a currency from a currency board is strictly a function of only one thing.
And that's the demand for. That currency, that term terpenes, the quantity of the currency. That's in circulation. There is no monetary policy. Uh, we have to, we have to end it there because that's all the time we have. But, uh, I think you all got your points across. Thank you very much for your time. That was, uh, that was a great talk, Hong, uh, Dr.
MOS and professor professor hanky. Thank you all for participating. And coming on the show with us. I hope to speak with all of you individually again, very soon. Thank you. And thank you for watching Kitco news. Stay tuned for more coverage. I'm David Linn. . .